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Entrepreneurial Planning — Entrepreneurship STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceEntrepreneurshipEntrepreneurial Planning5 Marks
Question
Describe the various components of a financial plan.
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Answer

Following are the various components of a financial plan (i) Proforma Investment Decisions:
  1. This relates to how the enterprise's funds are invested in different assets so that the enterprise is able to earn the highest possible returns on investment.
  2. An estimate of fixed assets and of working capital should be clearly mentioned.
  3. Carefully, accurately and sequentially entrepreneur mention investment required in for: Land and Building, Machinery and Plant. Installation Cost. Preliminary Expenses, Margin for working capital, Expenses on research and development, Investment in short-term assets viz. raw material, level of cash, etc.
Importance: It helps to understand the total amount of finance required by the entrepreneur.
  1. Proforma Financing Decisions:
  1. Here, entrepreneur summarizes all the projected sources of funds available to the enterprise to raise finance. Sources of funds are from:
  • Owners i.e. Owner's funds
  • Outsiders i.e. Borrowed funds
  1. Entrepreneur's has to ensure the selection of best overall mix of financing for the enterprise so that the cost of capital and the financial risk stands minimized. Also the Return on investment and profitability stands maximized.
    1. Proforma Income Statement:
  1. It is a projected net profit calculated from estimated revenue minus projected costs and expense.
  2. It summarizes all the profit data during the first year of operations of the new enterprise.
  3. 'Sales by month' is calculated first, by using forecasting techniques like Marketing research, Industry sales, Survey of buyers' intentions, expert opinions, etc.
  4. While calculating the projected sales and expenses, entrepreneur has to be conservative for initial .planning purposes.
  1. Proforma Cash Flow:
  1. It reflects the projected cash available with the enterprise as a result of subtracting projected cash disbursements from projected cash accumulations.
  2. Cash flows only when actual payments are received or made. Mere sale on credit, will not generate cash.
  3. For simplification and internal monitoring of cash flow purposes, a simple determination of “Cash in LESS cash out”, gives a fast indication of cash position.
  4. While working out the cash flows, a conservative approach is to be followed, using some necessary assumptions so that enough funds could be maintained to cover the slag phase.
  1. Proforma Balance Sheet:
  1. It helps the enterprise to reflect the position of the business at the end of its first.
  2. A summary of the projected assets, liabilities and net worth of the entrepreneur is shown using Proforma 120 Balance Sheet.
  1. Break Even Point:
  1. The Break even point is that level of volume of production at which firm neither makes profit nor a loss.
  2. Here, the total revenue is equal to the total cost of a firm, at the given level of capacity.
  3. Calculation of BEP is useful for the entrepreneur as it help in assessing. Minimum level of output to be produced, The effect of change in quantity of output upon the profits, selling price of the product and profitable options in line of production.
  4. BEP indicate the volume of sales needed to cover total variable and fixed expenses by the new enterprise.
  1. Economic and Social Variables:
  1. In view of the social responsibility of business, the abatement costs are to be stated in the plan.
  2. It has a mention of the socio-economic benefits expected to accrue from the proposed investment like Employment generation, Import substitution, Ancillarisation, Export Promotion, Local resource utilization, Development of the Area, etc.

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